Credit Insecurity on the Rise: What Subprime Lenders Need to Know

Millions of Americans are encountering ever-increasing barriers to credit access, despite traditional credit scores improving. That is the overall takeaway from an online conference presented by the Federal Reserve Bank of New York today.

The presentation dissected results from the Fed’s latest report, “Credit Insecurity in the United States: 2018-2023,” based on national survey information and in-depth credit bureau analysis.

The Fed’s report underscored an increasing decoupling of credit supply from credit quality — one that disproportionately harms lower-income, historically marginalized communities. The report presents both an opportunity and a warning to lenders, especially those in the subprime sector.

While there have been signs of economic resiliency in the U.S. economy until the current trade wars erupted, consumers’ financial standing is still shaky. Most survey participants indicated that they would have difficulty producing $2,000 in case of an emergency. That is even more true when it comes to Black (58%) and Hispanic (53%) participants, as with those aged under 40.

According to the Fed, 7.5% of adults do not have a credit rating or file at all, and over 12% of those with ratings are nevertheless credit-constrained based on delinquencies, high utilization, or subprime ratings.

Researchers emphasized that these figures speak to profound structural inequities hidden in front-page economic metrics. As credit card debt levels and delinquency are increasing, many lower-income families are at their lending limits or in arrears. These consumers are unlikely to qualify for traditional credit products.

Central to the Fed’s report is the Credit Insecurity Index, which is used to gauge how effectively communities can avail themselves of and manage credit. It captures two core factors: whether individuals have a credit file or credit score, and whether they experience hassles in accessing credit in sustainable ways.

The Index measures five indicators:

• Lack of a credit file or score
• No access to revolving credit lines
• Credit limits that are maxed out or overused
• Poor credit scores (i.e., below 580)
• Ongoing payment delinquencies

Each is an indicator of financial stress. Over-borrowed credit indicates tight liquidity, and repeat delinquencies reveal instability or unexpected spending. Taken together, these metrics identify at-risk areas.

Nationally, the Index declined from 22.3 in 2018 to 19.5 in 2023. Disparities remain. Even with the national improvement, 41 million Americans reside in Credit At Risk or Credit Insecure counties.

This place-focused data provides banks with a window on concentrated financial distress — critical to developing credit solutions.

The report highlights another segment too often neglected in credit policy: young adults, defined as those aged 18 to 34. There are more than 30 million such Americans.

Without access to credit, consumers cannot qualify for traditional products or establish a credit score. This exclusion cycle is a source of long-term financial instability, especially for young, nonwhite borrowers.

Lenders have an opportunity to provide responsible credit-building products for thin-file consumers. Secured cards, rent reporting, and Buy Now, Pay Later (BNPL) products are options to consider — if they are configured to balance access with risk.

There is an increasing unmet demand and warning signs of distress. Event panelists underscored growing differences in prime versus subprime delinquencies. There are more delinquencies in subprime credit card debt and subprime automobiles, but not for prime borrowers.

This divergence suggests vulnerable groups are falling further behind. For lenders exposed to unsecured debt, this fragility could strain portfolios.

“Credit insecurity is a persistent challenge that affects nearly half of American households, limiting their ability to manage financial shocks and build wealth,” said Claire Kramer Mills, Assistant Vice President at the New York Fed.

To mitigate risk, lenders should use proficient modeling and review alternative data. Knowing cash flow and employment volatility beyond credit scores can help make underwriting more sophisticated.

Sharp disparities are revealed by the research of the Fed. Distressed ZIP codes and rural counties have higher credit denials, as well as credit avoidance. Disproportionately impacted are Black and Hispanic consumers — even when controlling for income and score.

Distorting the access statistics are discouraged borrowers who don’t apply because they fear rejection. Meanwhile, 60% of counties kept the same credit classification from 2018 to 2023. Most of the 444 counties that were classified as credit insecure in 2018 remained so in 2023.

Black and Hispanic consumers are disproportionately likely to be denied credit.

Clearly, lenders should reconsider their targeting plans and match their products to what borrowers actually need. 

Subprime companies are confronted with both opportunities and problems. An unfulfilled demand from excluded borrowers exists, but the barriers to meeting that demand remain.

Lenders need to think more broadly to identify acceptable borrowers. Income fluctuations, pay-per-project work, and cash flow uncertainty provide information missing from credit scores.

One of the key allies in this endeavor is the non-profit network known as the Credit Builders Alliance (CBA). CBA assists in reporting alternative data to credit bureaus. CBA also teaches organizations to better serve credit-invisible groups. Subprime lenders can use this alliance to build products that report rent, utilities, and small loan payments.

Fintech firms are sprinting ahead with innovations such as cash-flow underwriting, earned wage access, and app-based credit builders. But credit reporting infrastructures haven’t quite kept up. That is beginning to change — Equifax, for example, recently increased its data and analytics presence in Google Cloud Marketplace to provide lenders with greater access to alternative credit information. 

But much of the sector continues to hold back. Until the big bureaus include these new sources of data in their mainstream credit scores, subprime lenders and technology pioneers will have to work in tandem to bridge the gap — and to campaign for wider acceptance of credit behavior in the real world.

Credit insecurity is systemic. Solving it will require cooperation among policymakers, lenders, and local leaders.

The Credit Insecurity Index is an influential tool. It supplies insights that assist in identifying underserved markets and creating products specifically. 

Ambika Nair, a Community Development Analyst at the Federal Reserve Bank of New York, said the Credit Insecurity Index “can be used by different community stakeholders to assess the state of credit health in their communities, and that knowledge could also help communities assess their overall resilience against financial shocks and promote policies that improve credit access and affordability.”​

Credit insecurity is stubborn, but lenders that employ smarter data, fair practices, and real-world solutions should thrive.